Cat Bond Investors Demand Higher Premiums as Weather Becomes More Extreme

January 11, 2023 by and

Investors in the $35 billion catastrophe bond market are demanding the highest premiums in years to cover issuers against disasters, as weather events become more extreme while interest rates rise.

Margins on new issuances of catastrophe bonds covering US wind events are now at the highest since 2019, at 5.3%, according to a report from reinsurance broker Gallagher Re. For other risks the premiums offered are at the highest since at least 2017.

The rise in margins comes after disasters including Hurricane Ian — the costliest storm for insurers since Katrina — saddled catastrophe bond holders with losses last year. An index by reinsurer Swiss Re AG which tracks the total return of such bonds, also known as cat bonds, tumbled 10% after the hurricane struck, causing devastation along the coastline of Florida.

January Renewals See Hardest Property Catastrophe Reinsurance Rates in Generation

And unfortunately for cat bonds, the hurricane, along with other natural disasters, happened during a year when global central banks hiked interest rates aggressively to combat soaring inflation. That means that safe corporate bonds now offer a yield of 5% globally, and come without complex risks like flooding and volcanoes to consider.

“Extreme weather events have led to high insured losses in 2022, underpinning a risk on the rise and unfolding on every continent,” Martin Bertogg, head of catastrophe perils at Swiss Re, wrote in a recent report. “When Hurricane Andrew struck 30 years ago, a $20 billion loss event had never occurred before – now there have been seven such hurricanes in just the past six years.”

Catastrophe bonds are issued to backstop risks that could include anything from natural disasters to lapses in the judgment of Credit Suisse Group AG’s risk managers. The instruments generally have short maturity dates and promise returns to investors outside of the insurance industry by taking on the risk that their principal could be wiped out by a severe event. The value of such bonds outstanding last month was around $35 billion, according to Gallagher’s report.

Rising interest rates might also affect issuance in the cat bond market this year, according to DBRS Morningstar.

“In an environment of higher interest rates, the cat bond market is going to have a tough time,” said Marcos Alvarez, head of insurance at DBRS Morningstar. At least $10 billion worth of cat bonds have been issued each year since 2017, but that number will probably fall this year, according to Alvarez. Some deals failed to materialize last year, with issuers turning to traditional reinsurance instead, he said.

Natural catastrophes caused at least $115 billion of insured losses in 2022, well above the average over the last ten years and including an estimated insured loss of up to $65 billion from Hurricane Ianalone, according to Swiss Re’s report. That adds to a longer-term trend of an estimated 5% to 7% annual increase in insured losses over the past decade, the reinsurer said.

The increasing threat of losses from disasters make issuing new cat bonds all the more important for the insurance industry, but it might be difficult to find enough investors.

The cat bond pipeline is “quite strong” into 2023, Gallagher said in its report. However, demand constraints “may make it difficult for some of the deals to succeed.”

Elsewhere in credit markets:


A deluge of debt sales is continuing on Tuesday, with 23 borrowers including Italy, Deutsche Bank AG and Schneider Electric SE offering 29 tranches that will likely amount to a minimum of €14.4 billion ($15.5 billion).

  • Issuance this week so far is set to exceed €50 billion by close of business Tuesday — that would be in line with 50% of survey respondents who forecast issuance would exceed that level this week
  • Insured losses from natural disasters hit about $120 billion in 2022, most of which was weather related, according to data compiled by Munich Re
  • Economists at Goldman Sachs no longer predict a euro-zone recession after the economy proved more resilient at the end of 2022
  • London-based Blackstone executive Vlado Spasov has left the asset manager, adding to a series of departures from its hedge fund arm; Spasov was part of the hedge fund solutions group that focuses on special situations
  • Fewer German companies are planning price increases during the coming months as cost pressures appear to be easing for the country’s firms


Asia’s dollar bond sales bonanza extended Tuesday as a slew of new deals arrived after three borrowers priced their notes at levels cheaper than those sought earlier.

  • Borrowers ranging from Macquarie Bank to the Mongolian government and Export-Import Bank of India are marketing new debt in the US currency
  • Japanese e-commerce giant Rakuten Group Inc. is also back in the US junk bond market to shore up more cash for its struggling mobile unit and to help repay debt
  • Philippines says the order book for its three-part bond peaked at around $28.2 billion, allowing the sovereign to tighten price guidance and increase the issue size to $3 billion from an initial target of $2 billion
  • Ultra-long corporate bonds from Indonesia delivered the largest returns in Southeast Asian dollar debt of companies last quarter


Investors are snatching up the riskiest US junk bonds, and companies are increasingly waking up to how much demand is ramping up.

  • January volume for US high-grade sales is well on its way to the $130 billion projected by syndicate desks
  • A trio of Canadian banks was raising debt in the dollar, pound and euro bond markets, putting an early record sales marker within reach
  • Studio City Finance Ltd. and Melco Resorts & Entertainment Ltd. bonds were among the biggest gainers in the US high yield market on Monday as China stopped requiring quarantine for arrivals as it ends its Covid Zero policy

Photograph: Cars are submerged in floodwater after heavy rain moved through the area on January 09, 2023 in Windsor, California. The storms toppled trees, flooded roads and cut power to tens of thousands. Photo credit: Justin Sullivan/Getty Images.